Friday, July 8, 2016

Momentum Wins! US Markets Remain in Uncharted Territory

Value investors that look at company fundamentals have to be scratching their heads this morning as they watch the markets. Momentum traders who only care about following very short term trends must love the markets today. At the end of June, 10 and 12 month simple moving averages told us to stay invested in stocks, bonds, and REITs. The markets send signals and the simple moving average is showing us that the beginning of July was not the month to sell equities. How long can this rally from March 2009 last? The market has still not had a monthly close over 2130, but today's US Employment report almost guarantees that the shorts getting squeezed along with momentum trades will help the market climb the wall of worry over 2130 (until this happens the market peaked in 2015). Doug Short has illustrated that the markets are not cheap (link 1 , link 2 and link 3), but like other periods of overvaluation -this condition can last longer than investors expect and expensive markets frequently become more expensive. Jill Mislinski writing for Advisor Perspectives with Doug Short shows us that this market is in uncharted territory. Jill writes, "Never in history have we had 20+ P/E10 ratios with yields below 2.5%."John Hussman who has been waiting for this bubbly market to pop for years summed it up this way on his latest weekly commentary:

Much of America has still not recovered from the violent consequences of the last yield-seeking bubble the Fed engineered. Now the Fed has engineered another, and has drawn nearly every pendulum to an extreme. We expect $10 trillion of “paper wealth” to be wiped from the U.S. equity market over the completion of this cycle, because it is not “wealth” at all. From an investment standpoint, the value of any security is inherent in the long-term stream of cash flows it will deliver to investors over time. Artificially jacking up financial securities through reckless monetary policy doesn’t change the cash flows that those securities will deliver over time; it only converts future expected return into past realized return, leaving nothing but risk on the table for years to come. Central bank intervention is not a benefit to long-term economic prosperity. It is the head of the snake.